Reverse amortization is a less common but powerful loan repayment strategy where the borrower makes fixed, regular payments that are less than the standard amortization schedule would require. This doesn't mean you're paying less interest overall, but rather, the loan's principal balance might initially increase or decrease very slowly, with interest accumulating faster than the principal is paid down, until later in the loan term when the payments begin to catch up and the principal starts to reduce more significantly.
This strategy is often employed for specific financial planning scenarios, such as during a period of lower income or when a borrower anticipates a significant increase in income in the future, allowing them to make larger payments to compensate for the initial slower payoff. It's crucial to understand that while the initial payoff timeline might be longer or the balance might grow, the goal is to manage cash flow effectively in the short term while having a plan for long-term repayment.
How the Calculator Works
The Reverse Amortization Calculator estimates the total time it will take to pay off your loan given a fixed payment amount that might be less than what's typically required by a standard amortization schedule. Here's a breakdown of the calculation:
Input Parameters:
Initial Loan Balance: The principal amount you owe at the start.
Annual Interest Rate: The yearly interest rate charged on the loan.
Fixed Payment Amount: The consistent amount you plan to pay regularly.
Payment Frequency: How often you make payments (e.g., monthly, bi-weekly).
Calculation Steps:
Calculate Periodic Interest Rate: The annual interest rate is divided by the number of payment periods in a year. For example, an 8% annual rate with monthly payments means a periodic rate of 8% / 12 = 0.667%.
Calculate Periodic Payment: The annual interest rate is divided by the number of payment periods in a year. For example, an 8% annual rate with monthly payments means a periodic rate of 8% / 12 = 0.667%.
Iterative Calculation: The calculator simulates each payment period. In each period:
Interest for the period is calculated: Interest = Outstanding Balance * Periodic Interest Rate
The payment is applied: Payment Applied = Fixed Payment Amount
The balance is updated: New Balance = Outstanding Balance + Interest - Payment Applied
This process continues until the New Balance becomes zero or negative.
Time to Payoff: The total number of periods is counted, and then converted into years and months for easier understanding.
Important Note: If your fixed payment amount is less than the calculated interest for a period, the loan balance will increase. This calculator helps determine how long it takes for the payments to eventually overcome this, or the growing interest, to bring the balance to zero. It's essential to consult with a financial advisor to ensure this strategy aligns with your long-term financial goals.
function calculateReverseAmortization() {
var loanAmount = parseFloat(document.getElementById("loanAmount").value);
var interestRate = parseFloat(document.getElementById("interestRate").value);
var paymentAmount = parseFloat(document.getElementById("paymentAmount").value);
var paymentFrequency = parseInt(document.getElementById("paymentFrequency").value);
var resultValueElement = document.getElementById("result-value");
var resultMessageElement = document.getElementById("result-message");
// Clear previous results
resultValueElement.innerHTML = "–";
resultMessageElement.innerHTML = "";
// Validate inputs
if (isNaN(loanAmount) || loanAmount <= 0 ||
isNaN(interestRate) || interestRate < 0 ||
isNaN(paymentAmount) || paymentAmount 0 && periods < maxPeriods) {
var interestForPeriod = balance * monthlyInterestRate;
var principalPayment = paymentAmount – interestForPeriod;
// If the payment doesn't even cover the interest, the balance will grow.
// This simulation will still work, but it might take an extremely long time.
// We check for balance growth to indicate potential negative amortization if payment < interest.
if (paymentAmount 0 && balance + interestForPeriod – paymentAmount > balance) {
// This condition indicates balance is increasing.
// It's important to acknowledge this for reverse amortization.
}
}
balance = balance + interestForPeriod – paymentAmount;
periods++;
// Ensure balance doesn't go into negative due to floating point inaccuracies when it's very close to zero
if (balance -0.01) {
balance = 0;
}
}
if (periods >= maxPeriods) {
resultMessageElement.innerHTML = "The loan may not be paid off within a reasonable timeframe with these payments.";
return;
}
var years = Math.floor(periods / paymentFrequency);
var remainingPeriods = periods % paymentFrequency;
var months = Math.round((remainingPeriods / paymentFrequency) * 12);
// Adjust if months are 12 or more due to rounding
if (months >= 12) {
years += Math.floor(months / 12);
months = months % 12;
}
var timeDisplay = "";
if (years > 0) {
timeDisplay += years + " year" + (years > 1 ? "s" : "");
if (months > 0) {
timeDisplay += ", ";
}
}
if (months > 0) {
timeDisplay += months + " month" + (months > 1 ? "s" : "");
}
if (timeDisplay === "") { // Case where it's paid off in less than a month
timeDisplay = "less than 1 month";
}
resultValueElement.innerHTML = timeDisplay;
resultMessageElement.innerHTML = "Calculated based on " + periods + " payment period(s).";
}